Earlier today I wrote about failure.  It was actually repost from an article I wrote in 2005.  The original piece only generated about 1,000 readers, this one found its way onto Techmeme and seemed to resonate with a far greater audience.  Here is the post:

If I had to come up with a single reason I started this blog it was to share my own ’startup’ experiences; the most cathartic of which was a post I wrote in 2005 titled “LayerOne: My Biggest Failure!“  Around 1,000 people read the post back then, but my readership has grown in the last three years to between 50,000 and 75,000 unique people; readers who never heard the story.  I believe some of the most important lessons one can learn are taught by failure and failure is something I have an MBA in.  I thought it might be valuable for those of you who haven’t heard the story to take a peak into my dirty laundry:

I was interviewing a candidate for Big in Japan and I asked him what his biggest failure was. He answered the question thoughtfully and at the end of the interview, as I always do, I asked the candidate if he had any questions for me. His first question, “what was your biggest failure.”

Most of us (well mainly me) have a hard time talking about our failures. I had to think for a minute and then the answer was obvious. In 1999 I founded a telecom company called LayerOne. It was the hieght of the private equity - venture capital funding wave and I caught one of the last waves. The idea was to create pooling points of local haul, local and internet connectivity and charge carriers for connecting between each other. I ran around the country (Sandhill Road, New York, Austin and of course Dallas) looking for private equity. Almost 100 venture capital and private equity groups were not interested in my idea…

I was only 28 years old so I had no idea how bad the odds were that I could raise the money to fund my idea so I rented a loft near downtown Dallas right above the Genesis Hair Salon (you could smell women getting permanents in the afternoons). I polished off my business plan and hired a lawyer from the Austin office of Wilson Sonsini and a secretary. Finally I found a group of investors willing to fund my idea. My series A was $11,000,000.00 on a $22,000,000.00 premoney valuation (not bad for a first time CEO with a business plan and a loft). The round was led by Crest Communications with additional investments from Soros Private Equity, Cabletron, and ADC Telecom. Soon I was off to the races hiring a team to help me build my dream. One of my key hires was detailed in Money Magazine here. I found a small, under funded competitor that was willing to sell and jump started our rollout.

I made every mistake in the book (I had a lot of help making the mistakes). By the summer of 2001 we were well on our way to meeting our goals for the completed ‘pooling points’ but we had not been able to raise the second round that would enable us to complete our nationwide buildout. We had leases across the United States (even a few options on spaces in Europe), but not enough money to build them out. Our original investors were trying to raise their second fund (a fund they never closed) and everyone was scared of the telecom space. We managed to raise another $9,000,000.00 to ‘bridge’ us to the ‘big’ round. Our lead investor, Crest Communications, had a relationship with First Union and suggested that we use their bankers to help us raise our second round. Their effort was extensive (scores of meetings in New York, Chicago and San Francisco), but ultimately unsuccessful.

So I reverted back to my old strategy, call everyone myself and set meetings. Most everyone turned us down, but finally we got a term sheet from TL Ventures for $40MM ($60MM short of the total amount we would need to get to break even). Everything looked like it was going to work out. But soon it became apparent that there was a big catch in our term sheet? TL would need to find (actually I would need to find) other investors to fund $30MM of the $40MM. Our existing investors would come up with $10MM bringing our total to $20MM, but finding the other $20MM seemed impossible. Nortel blew up in the summer and of course Enron crumbling did not help. We were in big trouble. Neither TL or us could find the last $20MM needed to close the round (and no they would not close without the total $40MM).

El Paso Energy had started a telecom business and talked to us about acquiring the company. It seemed like a good option should the fund raising effort fail - something I was getting more and more worried about. We received a term sheet from El Paso that would return 100% of the paid-in equity our investors had made and provide jobs and options to the management team (i.e. me). This was not a great option, but as we would be out of cash by July it seemed like the prudent thing to do. Our investors (Crest) decided that the deal was unacceptable and that we should pursue other options (including the TL deal still on the table). Next, we were contacted by Universal Access about a potential acquisition. We finally came to terms, but the deal did not make sense to us. The deal was for stock (UAXS was traded on the NASDAQ) worth around $5MM and out of the money warrants valued with Black Schoals at something like $20MM. It seemed to me that the warrants would NEVER be worth anything, but on paper this deal looked better than the cash deal offered by El Paso. We signed the deal and Universal Access covered our payroll in June. The deal never closed. By the time the deal was dead El Paso was out of the market - they were paralyzed by the Enron debacle.

So the only option seemed to be Chapter 11. Ug! I was sick to my stomach - bankruptcy was not a good thing to have on your resume. So I started running around looking for capital to fund a reorg. I found two groups who were interested in the deal. We figured it would take $2MM to buy the business in a 363 asset sale and $2MM to get it to break even. We were going to take the sites that were cash flow positive (or near positive) and a reduced staff 12-15 employees and run the business. By the end of August 2001 we had the sale and successfully bought the business out of Chapter 11. We were in bankruptcy for around 30 days - one of the quickest in the history of our jurisdiction. So on September 11th 2001 I was headed to Hughes and Luce to sign the closing documents with our investors so the money could be transferred to the court for the sale. You might recall that the most deadly terrorist attack on our country happened on that day. I figured the deal was dead… But the next day we closed and LayerOne II was born.

The impact? Most of our investors (only three stayed in the new deal) lost everything - $20MM down the drain. LOTS of employees hated me (I assume they still hate me). This was the lowest point in my life. I was able to salvage the business for our clients, a few original investors, a few key employees and my family - but the majority of our investors and vendors paid the price of MY failure. I can blame a lot of folks, but ultimately it was my failure. How did it turn out?

Actually, fairly well. We were able to turn a profit in a few months and grew profits by around $20-30K per month for a couple of years. By 2003 we had made several investments outside of LayerOne and I made the decision (with more than a little help from our investors) to take over operation of Architel and LayerOne was positioned for sale. It took about a year, but LayerOne sold to Switch & Data for a 600% return for the investors ($4MM to $22MM in less than four years). It wasn’t Google but it was a big swing for me. I learned a lot, made a lot of mistakes and ultimately became a better businessman and hopefully a better person as a result.

Reminder the Startup Happy Hour is this Monday at 5PM.  See you there?  Please RSVP HERE.

Are you interested in connecting with the local startup community?  We are working to build a vibrant startup community here in Dallas every bit as interesting and dynamic as San Francisco, Boulder, Boston or Austin.  The first step is engagement.

The first Dallas ’startup happy hour’ went so well we decided to make it a regular thing (every other Monday).  We hope to see you at the INFOMART High Tech Bar at 5PM.  If you need directions or help finding us feel free to call me at 214.550.2003 or if I am not available try our help desk at 214.550.2002 (during business hours only).

Upcoming ‘Startup Happy Hours’ (always on a Monday between 5PM and 8PM):

August 4th, 18th

September 1st, 15th, 29th

October 13th, 27th

November 10th, 24th

December 8th, 22nd

Please RSVP on Upcoming HERE (we are trying to keep the group under 50 people).  Directions HERE.  The ‘Startup Happy Hour’ is sponsored by SpringStage.  If you are interested in sponsoring an event please contact me (Alexander Muse) at 214.550.2003.

I have been doing almost 99% of my blogging on the Texas Startup Blog and as a result it may seem that there isn’t much going on at Big in Japan.  First, we are actively growing ServiceGuy - now in more than 21 cities around the United States.  WhiteBox is launching WhiteForm this week to several auto dealers.  Fan Podcast, now in its third year, is being featured on FX’s hit series The Shield this season.  We continue to manage custom technology for LEGO and their LEGO Universe project.  Finally, we are actively developing SocialTones for the new Google Android phone platform.

What is next for Big in Japan?  Look for exciting progress on SimpleTicket (our VERY neglected trouble ticket system) as well as some interesting work on Nagios (the network monitoring system we have used for years).  Our new coworking space is open (our first tenants are moving in on Thursday).  Anyway, lots going on.  Almost too much to cover in a simple blog post.

We have mentioned our latest project a couple of times since February, but I thought it was time for another update on SocialTones (Gravatar for RingTones built for Google’s Android phone platform).  We had an full team meeting on Friday to talk about the development of the application.  We settled a few outstanding issues such as the ‘infinite contact quandary’ and our various ideas for monetization.  Our current goal is to have the application ready for the first Android phone (mfgr’s, contact us if you want to work together).

Over the past three years we have delivered cool and innovative social applications to clients like Lego, FX and TechData.  While our applications were cool and innovative, our business model was stuck in the past, well not anymore!  I am pleased to announce that Big in Japan’s new development model is 100% free.  Got an idea for a cool application for your business?  Simply provide the plans to Big in Japan and we will build it, host it and manage it for free!  What is the catch?  None.  We will do it all for free.  This new pricing plan is effective today, April 1st, 2008.  If you want to learn more, call 214.550.2003 and ask for Alex.  Cheers!

Sixty days ago we began working on the current version of Whitebox™ and we are happy to announce that the majority of the system has been completed. We are currently resolving obvious bugs and should be ready for private beta early next week. What is Whitebox?

WhiteBox provides technology enabled finance and collection products for the automotive industry. Our customized solutions provide warranty providers the ability to offer car dealers products such as new and used warranties, gap protection and after market to consumers who do not qualify for traditional finance products.

Our ACH collection system, married to our state-of-the-art web interface and electronic signature collection technology create a seamless finance solution. Our software engineers work closely with our clients to customize our offerings to meet the specific needs of each product.

By combining our robust banking interface and our hosted web application, car dealers are able to generate significant profits without extensive training and related overhead.

One of our favorite clients, LEGO, keystone toy the ‘Brick’ turns 50 today!  What a legacy.  Two weeks ago several LEGO employees came to Dallas to check on our progress and to give us a sneak peek into LEGO.  Their corporate overview had some fascinating information, including today’s anniversary of the Lego Brick.  Of course, Gizmodo scooped me on this one ~ way to go guys!  Here are some fun facts (via Gizmodo):

LEGO brick curiosities

• There are about 62 LEGO bricks for every one of the world’s 6 billion inhabitants
• Children around the world spend 5 billion hours a year playing with LEGO bricks.
• More than 400 million people around the world have played with LEGO bricks.
• LEGO bricks are available in 53 different colors.
• 19 billion LEGO elements are produced every year.
• 2.16 million LEGO elements are molded every hour, or 36,000 per minute.
• More than 400 billion LEGO bricks have been produced since 1949.
• Two eight-stud LEGO bricks of the same color can be combined in 24 different ways
• Three eight-stud bricks can be combined in 1,060 ways.
• There are more than 915 million combinations possible for six 2 x 4 LEGO bricks of the same color
• 7 LEGO sets are sold by retailers every second around the world.
• The LEGO bricks sold in one year would circle the world 5 times.
• 40 billion LEGO bricks stacked on top of one another would connect the earth with the moon.
• LEGO bricks are so much more than just toys. They are used in classrooms from preschool to university level to teach everything from math, language skills and science to engineering and technology principles.
• The LEGO brick has inspired generations of innovators, like Jonathan Gay, inventor of Flash.
• World-renowned author Douglas Coupland believes the LEGO brick represents a “language in itself.”
• A January 2008 Google search produces 57.6 million references to LEGO bricks.
• There are 55,600 LEGO videos on YouTube.
• Google co-founders, Larry Page and Sergey Brin, used LEGO bricks to build the external low-cost and expandable casing for ten 4GB hard disks when they were busy developing the Google search engine (today, they have reportedly been used in Google’s college graduate recruiting exercises to test potential candidate’s creative horsepower.)

Thanks LEGO!!!

We get asked all of the time, “who should I call to raise money for my latest idea?”  We usually point them to the Texas Startup Blog’s Venture Capital Directory, but more recently we have been excited about the work Jeff Williams of Hunt Ventures has been doing.  Read more about, ‘Jeff Williams, hottest VC in Dallas!‘.

I began the Texas Startup Blog back in June of 2005 writing more than 1,500 articles about entrepreneurship, startups and venture capital.  Ironically, almost half of my ‘potential’ readers would visit once and notice that I was writing about politics or my personal life and click away.  They had no idea what the site was about.

Late last year I decided to ‘merchandise’ the value of the site by creating a homepage that was organized based on subject matter topical to entrepreneurs.  I would keep blogging as usual, but first time visitors would see a broad set of material relevant to them.  My old readers could still see my chronological blog.

This weekend the experiment began as I launched the ‘beta’ version of the site.  We are still working out the kinks, but it is pretty close to being finished.  Let me know what you think.  The site is based on WordPress and uses categories to organize the display of posts.

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Actually Rails 2.0.1 was released. Just a sidenote to David and his team. Our company wouldn’t exist if it were not for his efforts –> Thanks David…